What Does the Liquidity Crisis Mean to the Average Joe?

The New York Times has had a few articles about this. I just went to the site to find the one I had in mind, and this new one was on the front page:

http://www.nytimes.com/2007/08/11/business/11fed.html?_r=1

Brief excerpt:



The others I was thinking of:

http://www.nytimes.com/2007/08/10/business/10markets.html

http://www.nytimes.com/2007/08/07/us/politics/07edwards.html

http://www.nytimes.com/2007/08/06/business/06home.html

From the last Link:



I'm wondering if that may not have been the intention. Foreclosures, depressed housing market,... Makes it easier for that concentrated group at the top of the wealth ladder to buy up land / property.

I heard on CNN this morning that one thing that is already starting to happen is that everyones credit card rates may rise to compensate for interest / money lost elesewhere. Those with credit card debt will recieve a two week notice of the increase, but that isn't time enough to pay it off. Most won't be able to do anything to consolidate onto a lower rate loan, second mortgage or credit card because there isn't lending taking place. So not only are people losing their homes, there is the likely chance that anyone with credit card debt is getting ready to be hit with a higher rate.

exactly why it would be idiotic at this moment in time to accept a credit card offer from anyone especially these sub prime ass clowns.

Maybe in a way it's a good thing this is happening.... perhaps it will force us to save a little and prioritize our needs and wants.... something this society as a whole has gotten away from. I know I've certainly been guilty of spending without thinking in my life but no more.

The free ride is over, America is on the decline.

I just read that first article (I get the NYT daily but didn't have time to read it earlier) and one point they make is that lowering interest rates at this point would remove the penalty from people who made bad/ risky choices, and so they'd be more likely to make those choices again and just create a whole other crisis down the line.

One consequence will be that credit will be tight and as a result, individuals will have a much harder time borrowing money, to buy a home. Since it will become harder for people to get a mortgage,
many homes, now on the market, won't be sold and in addition, new homes will not be built at the same rate as they've been in the past.

As interest rates increase in ARMs, people will have to pay more, each month in their mortgage payments. As a result, they will have less to spend on other things.

Basic result..."trickle-down" slow down all around.

The next thing to be affected will be the college loan market. If kids can't get bank loans for school, some will have to drop out of school.

What then?

No education, no job?

I imagine that mortgage lending will tighten back up.

I'm not sure that it will have much effect on credit card lending; big business doesn't seem to learn from other industries' mistakes.

Housing prices will slump for a little while, then start to climb back.

Lots of folks will have bad credit from their mortgage going belly-up.

That attitude has been around since the founding of the country, but folks are still here and have a higher standard of living than ever.

Increasing the interest on credit cards could throw some people into bankruptcy. If that happens the companies will suffer.

bookmark

Here's an article about the Credit Card Rates.


Snippet:

Of the hundreds ( or even thousands ) of stocks that fell in value, this past week, a few like BUD increased.

This is something I can't figure out.

But the original question was about "liquidity".

As I understand it, the current issue is that Bank A doesn't know if Banks B, C and D are in good financial shape or about to go under. Normally, these banks borrow from each other if they need a little extra cash on hand. The loan is paid back within a day or two. This means that the banks can afford to invest most of their assets since they're effectively pooling their cash. The personal equivalent is having a credit card you can fall back on in case you need to make a large, emergency purchase. You don't need to keep lots in your checking account because you know that the credit card can handle it until payday or until you can assess some more illiquid asset to raise the cash.

But now, each bank doesn't know if its neighbors are financially sound. That means they don't want to make these short term loans for fear of getting stuck by a floundering bank using these short term loans to cover losses. This lack of confidence means that each bank has to keep sufficient cash on hand at all times instead of relying on other banks to help out in case of a crunch. Raising that cash means less lending, selling assets or not investing as aggressively and lower profits.

At the top end of the scale, banks don't lend to folks like us, they lend to companies by buying investments. Now companies can't get access to capital for growth. Of course if they are willing to pay for it in terms of interest rates, they will find someone to lend to them, but higher interest rates make investments less favorable and some projects that looked reasonable before now don't meet the payback criteria. Less projects, less jobs, rising interest rates, etc. mean economic turndown.

By injecting money into the system, the government is not buying out the losers, it is telling the banks that they don't need to start this spiral since there is plenty of short term cash available to meet their needs.

Changing the interest rate is another matter. Dropping the interest rate will help the "investors" who started this mess, but could potentially make things worse by providing more easy credit.

Thanks for the explanation, engineer.

The DOW is tanking as a result. People are running around like frightened chickens, selling their stocks...

I'm buying.

dys -- you are a delightful crank ! You lift my spirits when things otherwise look blue.

Actually if I had any sense at all I would dump 1/2 of my mutual funds/ indexed funds. So far I've realized just under 9% YTD and that's after profit taking. My valuation is certainly down but earnings are just getting brighter and brighter.